FLAT IS THE “NEW” DOWN

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One cannot help but ponder why markets are so optimistic. The old line from Greenspan’s 1996 comment “irrational exuberance” comes to mind. With a global market place flush with central bank money, any day that retraces is seen as a strong buying opportunity and any day that is flat is now seen as the “new” down. Hot money, well central bank money, has changed what was considered normal and has now become the new normal.

Ponder these details. Price to earnings ratio for the S&P 500 on the last 12 months is 22 vs a long-term average of 17. The Dow is not so different. The current P/E is 21 vs a ten-year average of 20 whilst the Nasdaq is 31 vs 23. Something is happening, it is not happening fast, but nonetheless the trend cannot continue.

The trick now is to watch cash holdings held by funds. A slip in cash holdings suggests investors are becoming too complacent and are taking on more risk (it’s a contrarian indicator). The current cash holdings of funds in the U.S. is about 4.4%. Using a BA research piece, 16% of investors are taking on more risk and this is a record high. Apparently, the magic number is 3.5% and at the current rate of .3% fall per month then we are not too far away, perhaps.

I am not suggesting the bull run ends in February rather to say that as the year has developed investors have continued to buy anything on any retracement. Much of that has to do with the $8tr or so of central bank money sloshing through the system.

So, Trump returns from Asia. Trump is expected as he tweeted he was going to say there is big big news from the trip. For the critics, they are wondering just what has happened on the trip as Trump has taken the accolades for deals done years ago and made them his deals, which of course they are not.

On other news Mitch McConnell believes he can get the Tax Bill through after Thanksgiving 23rd November, which is a herculean task. The GOP are trying to wrap the Obamacare repeal into the Bill and bring in Trump Care.

On the taxation front, some Fund Managers are fuming because of a little clause now which means that when a security is sold the actual security is no longer discretionary, rather the security that is the oldest must now be sold first. Some managers are saying this will affect returns.

The Tax Bill is a big deal and is the last chance this year that the GOP has to get anything done. With widening and growing deficits, the Bill becomes even more interesting as the GOP hawks have to weigh up whether the Trump Bill can supply the revenue required to close the deficit. At 3.3% growth, that’s probably a chance. However, this year as the growth has climbed so too has the widening. This year was also the lowest year of fines for institutions, so maybe there is a message there.

On a political front Jeff Sessions failed to remember a Russian meeting when meeting with the House Judiciary Committee. Sessions appears to have a real issue with his memory and what he calls truth. His forgetful nature should be a concern for the GOP especially as he is the Attorney -General and a good memory is essential.

With a new Fed Chair and an expected 3-tightenings in 2018 one wonders whether the economy can grow at the required rate. The yield curve is certainly weighing up the options and it suggests that the U.S. economy may well flounder. The yield curve tightened some 4 bp last night and bonds staged a small rally. Concerns over corporate borrowing costs and consumer borrowings are weighing heavily.

Commodities are falling but that may well be as a result of Chinese buyers obeying Beijing’s demands to winter many plants. Commodities have had a spectacular run this year, so any retracement is probably expected.

Recap:

Equities: the S&P 500 fell 0.31%. The Dow was down 0.21%. The Stoxx 600 fell 0.6%.

Currencies: The euro was climbed 1%.The pound rose 0.4%. The Bloomberg Dollar Spot Index fell 0.5%.

Bonds: the 2-year rose 1 points in yield to close at 1.69%. The level of the 2-year is now at a nine year high.The U.S. 10-year closed at 2.379 %. The 30-year closed at 2.836 % in 4 bp.

The curve flattened between 3 and 4 bp depending on the maturities. The 2/10 closed at 68.6, the 2/30 at 114.3 bp and the 10/30 closed at 45.5 bp. The European 10-year benchmark closes were, gilts closed at 1.328%, bunds at 0.413% and OAT’s 0.614 %.

Commodities: Gold rose 0.3% and WTI fell 1.8%.  China’s October aluminium output fell 2.3%. The EU has found Chinese steel was transshipped to Europe via Vietnam to avoid the European bloc’s tariffs. Nickel fell 5% as Chinese demand falters.

 

Aussie Market Today.

Bonds are likely to improve on the day. The general trend has been for slight improvement however with the inflation number due shortly. Most traders are likely to wait or cover shorts or reduce long positions. Trading will be choppy in a most likely thinly traded market.

Geopolitical tensions are still a concern although tensions appear to have been cowed for the moment.
Equities are likely to take the lead from the U.S. and sell down a little.

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